By Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income
China’s growth forecast revisions look worse than most EM peers. But decisions about the policy direction might have to wait until October’s party congress.
Hiking into Recession
Emerging market (EM) growth headwinds are real, and so are concerns about a sharp growth slowdown in the coming months and 2023 – despite the easing global supply chain disruptions. Aggressive frontloading of policy rate hikes in the past months is one reason, especially in Europe, Middle East, and Africa (EMEA) and Latin America (LATAM). And this explains why downside risks to growth are mentioned more frequently in EM central banks’ communications. The weakening global growth backdrop is another major concern – the perception that key global central banks are “hiking into recession” is a big discussion topic: note that the market expectations for the US Federal Reserve’s September rate hike remained elevated this morning, despite mixed retail sales numbers.
EM Growth Risks
The near–term growth risks are not distributed evenly (EM is not a monolith), but regional growth forecasts for this year are no longer falling after earlier downgrades (see chart below). Often this is due to upside surprises in major regional economies. A good example is today’s better than expected economic activity proxy in Brazil – it beat consensus by a wide margin, accelerating to 3.87% year–on–year in July. Turkey’s 2022 real GDP forecast was raised to 4.1% – albeit the underlying policies (such as cheaper credit in the run–up to the elections) might create problems and widen macroeconomic imbalances later on.
China Slowdown and Policy Response
One economy that is clearly bucking this tentative improvement trend is China. Its 2022 growth revisions continue to move south (see chart below). The release of monthly domestic activity indicators this evening (industrial production, investments, and retail sales) could be considered a litmus test for the latest attempts to prop up growth. The predominant view is that authorities might want to wait until the 20th Party Congress in October before disbursing additional stimulus (or making revisions in the zero–COVID approach) – today’s decision to keep the medium–term lending facility rate on hold points in that direction. However, reports about small deposit rate cuts in major state–owned banks suggest that domestic rates are likely to continue grinding lower – not a good sign for the renminbi, which moved closer to 7.0/U.S. Dollar, despite the recent changes in the FX reserve requirements and stronger than expected daily fixes. Stay tuned!
Chart at a Glance: EM 2022 Growth Revisions – Spot the Odd One Out
Source: VanEck Research; Bloomberg LP.
Originally published by VanEck on 15 September 2022.
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PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan’s index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG – JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.
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